FINANCIAL CRISIS ADVISORY GROUP Crowne Plaza Hotel London, The City. April 20 MEETING SUMMARY OPEN SESSION

Transcription

1 Members attending in person Harvey Goldschmid (co-chair) Hans Hoogervorst (co-chair) Toru Hashimoto Michel Prada Jerry Corrigan Nobuo Inaba Jane Diplock Stephen Haddrill Eugene Ludwig Tommaso Padoa Schioppa Klaus-Peter Müller Wiseman Nkuhlu Lucas Papademos Members attending by telephone John Bogle Fermin Del Valle Observers attending FINANCIAL CRISIS ADVISORY GROUP Crowne Plaza Hotel London, The City April 20 MEETING SUMMARY OPEN SESSION Sylvie Matherat Fernando Restoy Robert Esson Junichi Maruyama James Kroeker Nelson Carvalho Dennis Chookaszian Jerry Edwards IASB members attending David Tweedie Jim Leisenring John Smith Basel Committee of Banking Supervisors Committee of European Securities Regulators International Association of Insurance Supervisors Japan Financial Services Agency U.S. Securities and Exchange Commission IASB SAC, Brazil FASAC, United States Financial Stability Forum FASB members attending Bob Herz Larry Smith Members not in attendance - Yezdi Malegam, Don Nicolaisen, Raudline Etienne 1

2 Open session Briefings (IASB and FASB staff): 1. FCAG Co-chairs, Mr Goldschmid and Mr Hoogervorst, welcomed everyone to the meeting, and explained that Mr Robert Herz, Chairman of the Financial Accounting Standards Board (FASB), and Sir David Tweedie, Chairman of the International Accounting Standards Board (IASB), would be discussing recent developments at the FASB and IASB Briefing of the FASB Mr Robert Herz 2. Mr Herz began by explaining that the FASB has undergone voluntary efforts in the past six weeks to respond to the current economic crisis. 3. Mr Herz stated that for the past seven years, the IASB and the FASB have worked together to create a single set of high-quality, international standards. This is, to a certain extent, a voluntary effort by each Board. As explained in the Memorandum of Understanding s The Norwalk Agreement, (a voluntary agreement reached in 2002 by the IASB and the FASB to use their best efforts to make their existing financial reporting standards fully compatible), the intent of converging the two Boards is that the benefits will not only be seen by the United States, but also in the global markets. However, Mr Herz explained that this is not the primary statutory responsibility of the FASB. The primary responsibility of the FASB is to improve United States accounting standards. 4. Mr Herz noted that convergence also is important to other United States statutory bodies. For example, The Sarbanes Oxley Act of 2002 and the 2003 policy statement made by the U.S. Securities and Exchange Commission (SEC) state that the FASB should look toward convergence where it is helpful to do so. Mr Herz stated that convergence is important to the FASB Board members and staff alike. However, when emergency actions are required for the U.S. financial markets, efforts may be taken without a thrust toward convergence. 5. Mr Herz explained that at the request of Congress, the SEC issued an extensive report on the use of fair value accounting as of the end of December While the report supported the use of fair value accounting, it also included recommendations for improvement, which included a request for guidance on determining fair values in inactive or illiquid markets by, for example, assisting entities to define distress sales. Under FASB Statement No. 157, Fair Value Measurements, determining fair value in inactive or illiquid markets, distressed sales or forced liquidations should not be considered in valuing items, while orderly transactions should. The SEC Study, Study on Mark-To-Market Accounting also included recommendations to improve impairment accounting, including a suggestion to split the impairment of debt securities between a credit and non-credit portion. 6. On 12 March 2009, Mr Herz and Jim Kroeker of the SEC appeared before a Congressional hearing in which members of Congress asked that either the FASB or the SEC expedite guidance around fair value issues already in process. Mr Herz explained that the FASB Board agreed to expedite the guidance subject to appropriate due process. The FASB Board proposed guidance the following week, and had a 15-day public comment period to evaluate it. The FASB received over 600 comment letters, met face to 2

3 face with numerous constituents, and hosted numerous discussions with major investors in financial institutions. That feedback was considered in issuing FASB Staff Position (FSP) FAS and FAS 124-2, Recognition and Presentation of Other-Than- Temporary Impairments, and FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. 7. Mr Herz explained in comment letters, investors stated their interest in more detailed, timely, and granular disclosures, particularly by banks, to provide information about impaired and underwater securities and how the fair value for those instruments was determined. In response, the FASB issued FSP FAS and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which makes annual disclosures necessary during the quarter. 8. While Mr Herz stated that the FASB believes that the three FSPs noted above are responsible and appropriate responses, the FASB does not view them as long-term solutions. Mr Herz explained that the long-term solution is the joint financial instruments project with the IASB, which is aimed at developing a single, high-quality standard to improve financial accounting and reporting for financial instruments. 9. In responding to a question, Mr Herz explained that the FASB staff s and Board members ability to work around the clock to issue quality standards was extraordinary. Additionally, Mr Herz noted the FASB s continued commitment to convergence with the IASB, while simultaneously responding to the needs of the world s largest active market in the United States. Mr Herz explained that convergence and responsiveness are good public policy objectives, but that problems can arise when the two conflict. Mr Herz expressed his belief that the group can provide guidance for how to deal with the conflicting nature of the two objectives. 10. A member noted that the impairment guidance issued by the FASB will presumably conflict with the ability to create a single impairment model, a goal of the joint standard on improving financial instruments. This member asked if the FASB perceives any political danger in doing so. Mr Herz explained that impairment will be a difficult issue because the Boards may have different perspectives. Furthermore, Mr Herz explained that in his opinion that impairment accounting would not need to exist if financial instruments were to be measured at fair value or current value. 11. In answering a question, Mr Herz explained that if the FASB and the IASB expose a joint draft on improving financial accounting and reporting for financial instruments by the end of the current year, a final standard might not be issued until Briefing of the IASB Sir David Tweedie 12. Mr Tweedie explained that very positive moves are being made in converging United States and Japan accounting standards with international accounting standards, including a consensus on a single set of standards that the United States and Japan are both currently engaged to converge with. Specific to the United States, Mr Tweedie explained that SEC Chairman Mary Shapiro has expressed interest in creating a single set of highquality accounting and reporting standards. Specific to Japan, a road map for converging with International Accounting Standards has gained support by interested constituents. 3

4 13. Mr Tweedie noted that the IASB and the FASB are under pressure, including situations in which the European Union asked the IASB to modify guidance on reclassifications, and when U.S. Congress asked the FASB to expedite guidance on illiquid or inactive markets. Neither Board has been happy to take immediate action. 14. Mr Tweedie explained that a fundamental problem of not having pure convergence between nations is that groups will pick different parts of standards they like, while not adopting others. Mr Tweedie asked the group to discuss how the FASB and the IASB can effectively respond to the current crisis without undermining the quality of the standards within the organizations themselves. 15. In addition, Mr Tweedie noted responses the IASB is taking to recommendations by the Group of 20 (G-20). a. Though it took the predecessors and the IASB 12 years to produce IAS 39, Financial Instruments: Recognition and Measurement, the IASB and the FASB have accepted the challenge to complete a comprehensive, high-quality, single standard to account for financial instruments within a shorter time frame. b. The IASB understands the need to address procyclicality and loan loss provisions, and has met with the Basel committee (a discussion the FASB plans to join). c. The IASB has produced educational guidance on fair values in illiquid markets and asked experts to amend and update the guidance as necessary. d. The IASB has drafted standards on derecognition and consolidations and plans to finalize them within a year. e. The IASB has increased disclosures of liquidity risk and, in an effort to converge, disclosures of levels 1, 2, and 3 of U.S. generally accepted accounting principles (GAAP). f. The IASB hopes to issue a fair value measurement Exposure Draft within a few weeks. The IASB hopes to issue a standard by October on reducing the complexity of financial instruments. g. The IASB is looking at different methods of provision, including the incurred loss model and the expected loss model. h. To increase country involvement. The IASB is increasing the size of its Board from 14 to 16 members. Additionally, the IASB s advisory committee is being reconstituted to increase involvement from various constituent groups. 16. During a recent meeting with FASB, the Boards agreed to conduct a fundamental reevaluation of accounting and reporting of financial instruments. Mr Tweedie explained that the Boards would like to have two classifications for financial instruments; one being full fair value and the other possibly current value. Mr Tweedie expressed the determination of which classification a security is in will be based on either an entity s business model, management s intent, or the variability on cash flows. If the Boards agree 4

5 on a single impairment model, it may be a modified incurred loss model, a dynamic provisioning model, or an expected loss model. To determine proper accounting for unexpected losses, the Basel committee has made suggestions on accounting for appropriations and reserves. 17. Once the FASB has dealt with particular issues in the United States on improving the accounting of off-balance-sheet vehicles, the FASB would assist the IASB to complete its Exposure Draft, and the FASB would later expose the same Exposure Draft in the United States. 18. With respect to the recent FASB literature, Mr Tweedie explained that the IASB understands the call to level the playing field, and has asked constituents to provide comments on how the IASB should respond. Mr Tweedie noted that tentatively, the IASB believes that the FASB fair value guidance is consistent with the principles to IAS 39. As for impairments, the concept of other-than-temporary impairment does not exist in international standards. Although the IASB considered changing the fair value impairment model, it was deemed to be too large a change. Additionally, the FASB s impairment model is very different than the IASB s impairment approach. 19. Mr Tweedie explained that the IASB issued a request for views and was told by constituents not to address accounting issues piecemeal, but, rather, to form a comprehensive model to account for loan loss provisioning. This was similar to feedback received from roundtable discussions in Tokyo, New York, and London. 20. In responding to a question, Mr Tweedie explained that short-term projects detract from meeting the G-20 timeline of issuing a joint standard to improve financial instrument accounting and reporting. 21. A member noted that he is concerned that current developments may overlook the work of the group. Given political members are national, standards could be renationalized and possible international improvements and changes could be overlooked. International consistency and independence are very important. The member asked the co-chairs to do something in advance of issuing a final report, so that the work of the group won t be overlooked. Part I: Standard Setter Governance, Due Process, and Agenda Priorities: Question 1: How (and by whom) should oversight be exercised over accounting standard setters on a national (or international) basis to ensure appropriate independence, accountability, and transparency in the standard-setting process? Question 2: What criteria should accounting standard setters consider in balancing the need for resolving an emergency issue on a timely basis and the need for active engagement from constituents through due process? Question 3: In light of the financial crisis, what additions or modifications should be made to the IASB s and the FASB s joint and separate agendas, or to the processes by which those agendas are set, and why? 5

6 22. Given the nature of the three questioned listed above, the co-chairs opened the floor to discuss all topics. General themes in the discussion 23. In general, the group sympathized with the fact that the Boards have to respond to emergency situations while dealing with political pressures. Additionally, the group agreed that though convergence is a very important issue, the need to shield standard setters from political influence also is very important. 24. Public due process is an important and necessary step to setting standards, and the group appreciated the effort the FASB undertakes to ensure proper due process in issuing emergency guidance. 25. In general, the group agreed that it will take time to converge. Additionally, there was a consensus that there is a tendency to underestimate what has been accomplished in convergence and a danger of misjudging the commitment that already exists. 26. The group agreed that independence must be maintained. Furthermore, the group agreed that Congress does not always understand the complexity in accounting standards when suggesting areas for improvement. 27. Members agreed that simplification where possible should be a key objective of the joint effort on improving the accounting for financial instruments. However it was also recognized that complex issues cannot always have simple solutions. 28. The group agreed that accountability and oversight are necessary and acknowledged and showed support for the IASB s monitoring board and both Boards foundations. 29. The members agreed that the FCAG must communicate that with the highest speed and best cooperation, and that political pressure could ruin convergence. The FCAG should assist the FASB and the IASB in presenting priorities, and explain that a unilateral movement by either Board will increase the complexities of full convergence. 30. Members agreed that communication and commitment of a timeline to converge is important. Yet, the group agreed that accounting should not sacrifice quality for speed. 31. The group agreed that resources should not stand in the way of creating high-quality accounting standards. 32. In general, the group agreed that in determining how an accounting standards board determines what is a priority or not, the board should consider if this concept addresses immediate crisis issues, if the move will foster convergence, and if the move is consistent with work of outside organizations or groups. Further detailed comments by members 33. One member noted that temporary solutions, with the understanding that amendments will be brought on later, is satisfactory because it accomplishes the current need while maintaining a long-term goal. 6

7 34. A member noted that there is a timing gap between when the group would like to see convergence and what the Boards can reasonably be expected to do. As a practical matter, that gap is longer rather then shorter. 35. One member noted that convergence and the independence of standard setters are linked. If the standard setters are to create a comprehensive financial instrument project, it will be difficult if each Board is being influenced by outside forces. 36. A member noted that a problem of having short-term projects is that they are done in the context of one of the two sets of standards. This member questioned how cost beneficial this is to the marketplace and preparers of financial statements, given that both may have to adjust again in a few months if a joint standard becomes effective. This member also noted that most who ask for short-term fixes hope that it will become permanent guidance. 37. A member noted that disruption, cost to the system, and a misunderstanding of how to level the playing field are reasons political pressures must not interfere with setting accounting standards. Additionally, politicians may not understand the long-term effects of their decisions. 38. A member noted that for the 100 or more smaller countries typically not on the forefront of accounting influence, the most important accounting issue is having a single set of standards. 39. A member noted that the Boards need to paint a picture of what the long-term vision of the Boards are, to remind constituents what convergence looks like. Once finished, the Boards must ensure that all related parties agree with the ultimate outcome. Issues may arise when, for example, United States politicians and the SEC realize their role. 40. A member said that the group must realize international standards are adopted into regulatory requirements in many areas of the world. However, to expect international regulatory regimes to adopt short-term fixes and then ask them to readdress the same project on a long-term basis in the near future undermines the credibility of the standard setters. 41. One member noted the distinction of debt securities impairment between credit and noncredit portions distorts worldwide comparability. 42. One member noted that comment letters were due to the SEC on the Proposed Roadmap to Converging with International Financial Reporting Standards (IFRS). A member noted that though there is a support for convergence, there is not widespread support for the approved time scale of full convergence by One member noted that if the group believes that the United States must adopt IFRS soon, it should explicitly say so. 44. In responding to a question, Mr Herz stated that full convergence could take as long as years. He stated that while substantial convergence will result from completion of 7

8 the Memorandum of Understanding, there will still be numerous areas of difference between IFRS and U.S. GAAP. 45. Mr. Tweedie mentioned that if the international and United States accounting standards do not converge, constituents will be interested why it will have taken seven years for the United States to realize it will not converge when the IASB and Japanese accounting standards board may adopt IFRS in less time. Mr. Tweedie noted that some constituents mention that the FASB should be cut out of the discussion. 46. One member noted that the same individuals who want financial instrument accounting changed immediately state they would not be able to transition to a new financial instruments standard before A member noted that if the primary focus in the short run is financial instruments, substantial convergence will receive a large amount of credibility. 48. A member noted that the G-20 s perceived influence is different to the U.S. Congress as it is too many other parts of the world. 49. In response to the G-20 recommendation to complete a reevaluation of the financial instruments project before year end, a member noted that it is one thing to reach an agreement on a concept, it is another to write the rule, yet another to allow due process on the rule to take place, and finally another to implement the rule. All of these cannot be done in six months. However, accounting standard setters can work together to ensure that at least an agreement on a concept can be reached. 50. The current situation is very important, not only from the view of Americans, but also from other nations who are trying to converge, such as Japan. A member noted that many countries are working on how to adopt a new set of standards while continuing their own. This member pointed out that the United States deciding not to converge will affect the way other countries perceive convergence. 51. One member pointed out that the financial crisis began in financial institutions, the effects of which are spreading to other parts of the economy. Given this, that member wonders that if the Boards answer questions surrounding financial instruments, consolidation, and derecognition in joint projects, would this address 99 percent of the balance sheets of those financial institutions, and therefore the bulk of the issues? This knowledge may persuade politicians to not exercise pressure. 52. A member noted that there is a need to stress the importance of undue political influence; however, standard setters should not tell officials what to do because this may have unintended consequences. Furthermore, the FCAG should not make it seem that the FASB did something wrong by issuing the FSPs named in paragraphs 6 and A member noted that the United States is experiencing a decreasing interest in moving toward full adoption of IFRS because the average cost of adopting IFRS for a large company has been estimated to be $32 million dollars. However, if the United States does not converge with IFRS, a member questioned the incremental costs experienced by the capital market. 8

9 54. A member noted that there is a strong support to move toward a single set of standards; however, acceptance of this goal will depend on a proper time frame. 55. A member reemphasized that the problems that started the crisis cannot be fixed with accounting. Furthermore, another member noted that perfect market theory has been undercut, and the group must reflect this point. Output for the future A letter to the G A member noted that the G-20 has emerged as a group that influences how global decisions are made. This member emphasized that the Boards must consider the G-20 in creating accounting requirements. 57. A member said that there is a mismatch between the urgency of the G-20 and the events of the past three weeks, including the FASB FSPs on impairment, illiquid markets and disclosure. A few members noted that the most urgent accounting issues have been addressed, and that the G-20 should be made aware of the longer term goals of the accounting standards bodies, including the joint project to improve accounting for financial instruments. 58. A member stated that the group must present the priorities of the Boards, not just the short- and long-term goals of the Board. The group also should take into account the reality of the cycle that must be undertaken. It would be difficult for the Boards to agree on any project within six months. 59. The co-chairs agreed, with the consent of the group, to write an open letter to the G-20 with a positive and persuasive nature, expressing a sense of urgency that the FCAG stands ready to watch closely over the standard setters to ensure they speed up the process to converge the financial instruments project. The co-chairs also noted that they will make clear the realistic processes of the standard setters. Open session Part II: Further Exploring Matters Discussed at March 5 Meeting Fair Value Measurement (issues raised by Tommaso Padoa-Schioppa) Off-Balance-Sheet Items (any additional points to be raised by members) General themes in the discussion 60. Members agree that both Boards have gone a long way to deal with the problems associated with valuing assets in inactive and illiquid markets. 61. The group supported the joint project on improving the accounting and reporting of financial instruments. 62. The group continued to ask the Boards to work in the area of off-balance-sheet vehicles. Further detailed comments by members 9

10 63. Mr. Goldschmid stated he understands the arguments made to move away from a snapshot measurement of fair value, and he agrees that stock exchange pricing is not always accurate in terms of valuation. However, the co-chair stated that active stock market valuations are the best valuation approach (and most practicable and verifiable approach) now available in an imperfect world and financial markets and analysts adjust for the snapshot aspect of financial reporting. 64. Mr. Tommaso Padoa-Schioppa noted that an instrument may be more observable than another instrument at that instant; however, financial statements are used over a period of time, something that is not currently reflected in fair value measurements. 65. A few members of the group agreed that financial statements are a snapshot in time, and note that constituents reading the financial statements understand this concept. Additionally, an analysis of the months leading up to the snapshot are no more representative of the financial position of an entity at year end. 66. A member noted that commercial banks should never have been exposed to assets with extreme volatility. However, as a few members agree, this should not be fixed by the accountants, and hopefully the Basel committee will address that in their capital requirements. 67. A member explained that mark-to-market accounting is the best valuation model in wellfunctioning markets. To some extent, markets may not be the best valuation mechanism; however, it may be better then having management make an estimate of the value. This member explained that the largest advantage of using the market to value securities is comparability. 68. One member noted that accounting standards cannot deal with irrationally behaved buyers or sellers. Additionally, the member noted that the problems related to small private markets for individual instruments should not be portrayed to the large equity market that exists. 69. Two members expressed that available-for-sale securities should not be overlooked as a useful category for classifying assets. For example, given the complexity of the Japanese accounting systems and intent of management, the term available for sale is a very good description of many securities. A member noted that if accounting standard setters abolish the available-for-sale category, it will increase procyclicality because all equity securities will be moved to a trading account. 70. A member noted that too much emphasis is given to the debate between fair value and market efficiency. If a market is acting irrational, and the fair value of a security is meant to reflect the exit value of that security, it is meaningful to investors to know the irrational value. Furthermore, average prices will not make a market more stable because the past average is not a better indicator of the future. 71. A member noted that a truth exasperated in the past months is that credit risk and, therefore, credit instruments, are a higher form of risk than other forms of risk because they are asymmetric on the downside. Also recently, the ratio of level 3 assets relative to total assets has been going down, which is not intuitive. 10

11 72. A member noted that based on financial institutions in the United Kingdom and continental United States, losses and write-downs during the credit crisis have related to four main areas: (a) structured assets, (b) leveraged finance losses and write-downs, (c) real-estate losses and write-downs, and (d) write-downs in consumer credit. The member pointed out that only the first is valued at fair value, and the losses in structured assets is probably real. To be clear, the second, third, and fourth are not measured at fair value. 73. A member noted that accounting does not try to address the efficiency of the market, and that the argument should be focused on whether the group agrees with the objective of measuring a security at exit price. 74. A member noted that policy leaders do not understand the complex rules related to the categorization of securities, and that if policy leaders jump to conclusions it can be dangerous. 75. A member noted that individuals and groups have divergent views on what the IASB s agenda should be. Individuals want a quick fix to fair value accounting, to imperfect markets, and to reducing procyclicality, and all within six months, which is a rather difficult task. 76. A member noted that he appreciated the work done by the FASB on improving the accounting in illiquid markets, and believed that the markets are starting to show improvement. 77. A member noted that attention should be given to the upswing in values of financial instruments when the market was acting irrationally positive, because this also helped to cause the crisis. This member called for regulatory guidance when there is a potential over-valuation in the market. 78. A member noted that they are not entirely convinced that prudential regulators and accounting need to be mixed. This member noted that desired accounting figures should not dictate the reality of a business, and accounting should not be blamed when the problem is poor governance decisions. 79. A member sited a study to explain that the popular press has improperly characterized fair value accounting during the financial crisis. A study noted that with the exception of Citigroup, losses of $100 billion were experienced by the 13 largest banks in the United States. However, only 30 percent of the losses were related to devaluations due to fair value accounting. The member noted that the popular press ignores the fact that 70 percent of the losses were credit. 80. A member stated that there should be a distinction between individuals in an entity responsible for selling and trading securities, and those who value securities. They must be totally independent. 81. A member noted that accounting must demand better disclosures and create requirements for new disclosures. Part III: Written Submissions and Other Discussion Items: 11

12 Were the responses in the written submissions from constituents about what you expected or were there any significant surprises? Are there any other matters that you would like the FCAG to discuss, including any that may have been raised in the written submissions? 82. The co-chairs noted that the public responses were very good, with over 50 high-quality, thoughtful, and useful letters. 83. Mr. Charles Batchelor, Ms. Ellen Odoner, and Mr. Adam Van Eperen explained that there were 53 letters considered by the staff, and provided a summary of the main themes of the comment letters. (Editorial Note: The full comment letter summary, with a description of each question, is available at a. Question 1 Constituents explained that there is no doubt that society is currently in the middle of a very serious economic crisis. There were two clear and distinct views on the relationship of mark-to-market accounting and the financial crisis. The majority view was that mark-to-market accounting only played a positive role, if any, in bringing the financial crisis to light. The other view was that mark-to-market accounting was/is a causing factor of the financial crisis. b. Question 2 If prudential regulators were to require through-the-cycle or dynamic loan provisions that differ from the current IFRS or U.S. GAAP requirements, a majority of respondents who specifically expressed a preference suggested general-purpose financial statements should reflect the difference via an appropriation of equity or an appropriation outside of comprehensive income or by footnote disclosure only. c. Question 3 Overall, more respondents disagreed with the premise that offbalance-sheet issues contributed more to the financial crisis than issues surrounding fair value. Many comments, however, stated that financial reporting generally was not a major cause, whether it is securitization or fair value issues. d. Question 4 A significant majority of respondents agreed that a refined mixed attribute model should be used. Additionally, an overwhelming amount of respondents noted that management s intent is possibly the most important consideration in valuing a security. Lastly, most constituents agreed that it is premature and inappropriate to move to a full fair value model. e. Question 5 Most respondents acknowledged that there are likely to be situations in which accounting standards do need to be set on an urgent basis. These respondents focused on two key questions: when is a situation truly an emergency that requires the application of fast-track procedures and when there is a true emergency, what fast-track procedures are appropriate? f. Question 6 Respondents divided themselves into two groups: (1) The more popular view was held by those who believe that accounting standard setters should focus solely on developing standards to be used in preparing general-purpose financial statements that are intended to serve the needs of investors and other providers of capital, with macroeconomic objectives left to prudential regulators. (2) Those who believe that accounting standard setters should, or must work together with prudential regulators to develop accounting 12

13 standards that have, among their key objectives, promoting financial stability. g. Question 7 There was a general support for independence of the standard setters, and most constituents support convergence. Constituents noted that unilateral movement by either Board was in the wrong direction, and that any projects taken should be done as comprehensive projects, and not on a piecemeal approach. Further detailed comments by members 84. A member noted that a paragraph in the comment letter summary asked the Boards to evaluate foreign currency accounting, but questioned what necessary steps the Boards must take on an emergency basis. 85. A member noted that not many investors or investor groups responded to the questions. A co-chair noted that this problem occurs frequently in accounting comment letter responses, and the co-chair stated he does not believe that investors understand how large a mistake this is. 86. A member commented on loan loss provisioning. The member stated that accounting standard setters should allow for recognition of expected loan losses, and that this could have helped to decrease the degree of procyclicality, a conclusion also reached by the Financial Stability Board. It was clear from constituent responses that there is a need for enhancements to loan loss provisioning, but there were different views on how to achieve this. The member noted that through-the-cycle provisioning would complement the current loan loss provisioning model and not substitute the incurred loss model. The member noted that through-the-cycle provisioning can provide additional and relevant information to users of the financial statements to assess the true value of loans. This member stated that it is important that the balance sheet and income statement distinguish between incurred losses and through-the-cycle losses. Furthermore, through-the-cycle provisioning will contribute to transparency and financial stability. 87. A member stated that dynamic provisioning and through-the-cycle provisioning can be complementary. 88. A member noted that skepticism on the part of management estimates has been embellished by accounting with disclosures, roll forwards, etc. Another member noted that if the expected loss approach to loan provisioning is implemented, it will not smooth earnings; rather, it will keep the balance sheet stable and plug changes in the fair value of the loan to the income statement. 89. One member pointed out that microeconomic and macroeconomic issues need consideration when evaluating the merits of through-the-cycle provisioning. On the microeconomic side, it is hard to imagine that firms would independently decide how much to provision because management of the firm would be timid to appear as thought they are managing earnings. This would lead to a conclusion that accounting must consider having management objectively calculate the necessary provision. On the macroeconomic side, accounting must consider the decisions made by prudential regulators. 13

14 90. A member noted management should fully disclose (a) how any provision amount is determined, in the same respect as judgments, and (b) values that exist for financial instruments. 91. A co-chair noted that risk evaluation procedures by bank managers were a contributing factor to the financial crisis and, therefore, it is hard to say that anyone would feel comfortable giving more risk evaluation responsibility to bank managers. 92. A member noted that it is not the responsibility of bankers to understand where their entity fits in the provisioning cycle; rather, they must understand the position of their portfolio. Also, this individual mentioned that accounting standards should be set on a microeconomic level. Output for the future 93. The co-chairs, with the consent of the group, decided that the FCAG would meet again in December to follow up with and discuss the Boards efforts and proposed guidance in the areas of financial reporting, the financial markets, and the financial system. 14